Fran
Administrator
Questions:
301.1. In the FRM, various authors approach the classification of liquidity risk with different terminologies. However, the general liquidity risk framework is similar across each of Jorion, Dowd and Malz. Each of the following is true about the liquidity risk typology, across these key authors, EXCEPT which is false?
a. Liquidity risk has three major types: 1. Transaction (aka, asset, market); 2. Funding (aka, cash flow, balance sheet); and 3. Systemic (aka, crisis)
b. Transaction liquidity risk (aka, asset or market liquidity risk) can be modeled by either or both of an exogenous-spread approach or/and an endogenous price approach
c. A key example of funding (aka, cash flow or balance sheet) liquidity risk is the rollover risk created by the maturity transformation function in a traditional depository institution
d. The liquidity risk typology is well-defined into three buckets because the three major liquidity risk types do not interrelate; e.g., funding risk is not due to systemic causes; transaction risk does not constrain funding liquidity
301.2. Analyst Robert is reviewing his firm's liquidity risk models. He recalls from the FRM that Malz says that three causal factors of market (aka, transaction or asset) liquidity risk are tightness, depth and resiliency. He makes the following observations:
I. Tightness is likely captured with the bid-ask spread
II. Depth is likely to be captured with volume of the order as an input
III. Resiliency is likely to modeled with an equilibrium price estimate, and time, as key inputs
Which of the above is (are) true?
a. None
b. I. only
c. III. only
d. All are true
301.3. A firm's one-year cash flow at risk (CFaR), which is the firm's primary measure of funding liquidity risk, is reasonable by historical standards. However, somehow the firm is insolvent. If such a circumstance is possible, which of the following explanations is most likely?
a. The firm is funded predominantly by long-term debt
b. The firm has a high level of equity relative to assets
c. The firm's leverage ratio is less than 1.0
d. The firm cannot roll over its short-term debt despite highly-valued, long-maturity assets
Answers:
